The value or price of stocks goes up or down depending on various factors such as the economy, the performance of the business, or the political situation in the country. Stock prices are also affected by world events such as the war against terrorism in the Middle East or the tsunami in Japan.
Many investors are taking advantage of the fluctuations in the stock price that are caused by these events. They buy shares when the prices are low and they sell when the prices are high. This technique can be rewarding but it also involves high risk because your timing in buying and selling stocks should be perfect, otherwise, you’ll lose money when you made the mistake of buying when the price is high and selling when the price is low.
If you want a safer strategy, this is what you should do:
First, choose a good company that you’ll invest into. The company that you will choose should be stable and that you’re confident that this company will still be standing even after 10 years. In other words, choose a giant company.
Second, set a specific budget every month for buying shares. This can be a small amount like, let’s say, P5,000. Every month, you’ll buy P5,000 worth of stocks of your chosen company, no matter whether the price is high or low at that time. This is similar to putting money in a piggy bank every month.
After some time of doing this strategy, you’ll realize that even though the price of your chosen stock is always going up and down, the average price of your investment is growing.
This strategy is called Peso Cost Averaging. In this strategy, you are looking at the average price of your investment, not on the daily fluctuations of the stock price.
Consider the table below. The first two columns show the monthly prices of Stock ABC from January 2016 until January 2017.
Peso Cost Averaging means buying the same value of stocks regularly. In this case, it’s buying a maximum (not more than) of P5,000 worth of Stock ABC every month as seen in the third column.
The fourth column shows the lot size, or the minimum number of shares one can purchase or sell at a specific price range. For example, if a particular stock has a lot size of 10, you can buy a minimum of 10 shares of this stock, followed by 20 shares, 30 shares, and so on and so forth. You can determine the lot size for a particular stock price by checking the PSE Board Lot Table.
The fifth column shows the number of stocks that were bought every month. Notice that when the price of Stock ABC is high, you bought less number of shares; and when the price is low, you bought more shares.
The sixth and seventh columns show the cumulative amount you have already invested and the total number of stocks you already own.
The eighth column, or the Stock Value, shows the value of the stocks you own based on the stock price during the current month. This was computed by multiplying Total ABC Stocks by Price of Stock ABC.
And the last column shows how much is your profit or loss IF YOU SELL all your shares during that time. Notice how it fluctuates from being negative to positive over time.
Personally, here’s how I put this strategy into action:
As I write this post, Bank of the Philippine Islands (BPI) is selling at P99 per share and its lot size is 10 shares. So that means, if BPI’s price is P99 per share and it requires a minimum of 10 shares, then I’ll need at least P990 to buy shares from BPI. My monthly budget for stocks is P5,000. So for this month, I get to buy 50 shares of BPI at P4,950.
Every month, I buy the maximum number of BPI shares that I can for P5,000.
When will I sell? I will sell when my target price is reached, probably in about five to ten years (I’m not kidding).
When you are using Peso Cost Averaging, you think long-term to maximize your returns. You make the stock market your big piggy bank. Also, I am confident that BPI is still standing after 5-10 years so I’m not worried at all.
To recap, here’s how to do Peso Cost Averaging step-by-step:
1. Determine the amount that you can invest.
In our example above, we invested P5,000 each month, but this amount really depends on you. Most financial advisers, however, recommend at least investing P5,000 per month.
2. Determine how often you will invest.
We are investing on a monthly basis in our example above but again, this depends on you. You can invest weekly, monthly, quarterly, semi-annually or annually. Just do what is most comfortable to you. However, I strongly advise that you do it consistently so that you’ll develop a good habit out of it.
3. Wait . . .
When you are investing in the stock market, it is recommended that you have a long-term time horizon (around 5-10 years) so that you’ll maximize your gains. That’s why it is important to only invest money that you can afford to lose.
4. Sell when you achieved your target price or your investment objective.
When the amount of money in your portfolio has already reached your investment goal (such as buying a house, getting your kids into college, or retiring comfortably), then you should sell your stocks and enjoy the fruits of your labor.
There you go. I hope this post has helped you understand how to do Peso Cost Averaging and that you’ll apply it in your safe investing journey in the stock market.
By the way, If you want to know the basics on how to start investing in the Philippine stock market, you can check my previous article. To make sure you won’t miss any of my future articles related to stock investing and on investing in general, subscribe to this blog by entering your name and email in the Get More Stuff box above.
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